The Asian LNG buyers’ club is conservative by nature. A flicker of geopolitical risk, supply disruption or price volatility can cause sleepless nights from Tokyo to Singapore as the region’s buyers assess the potential impact. So, when freezing conditions hit the southern US last week, resulting in feedgas into LNG plants collapsing from above 10 bcfd to just below 2 bcfd, and with some Texas price markers soaring north of US$400/mmbtu, anxiety levels should have been rising.
But Asian buyers barely blinked, with Northeast Asia spot prices, which had been north of US$30/mmbtu just last month, continuing their descent back to normality. Why was the Asian LNG market so chilled? To understand the muted response to the polar vortex on the region’s gas buyers, I turned to Rob Sims, Global Head of LNG Short-Term Analytics at WoodMac.
What has been the impact on US supply? At its worst, our colleagues at Genscape estimated that almost 19 bcfd of gas production was lost last Tuesday due to freeze-offs, as water and other liquids froze and blocked the flow of gas out of the wellhead. This is equivalent to around a fifth of total US output. And with gas prioritised into heating and power generation, available feedgas into LNG export facilities fell sharply.
Feedgas dropped to zero at Cameron LNG, which was also reported to have lost power from the grid. Freeport was also completely offline for several days, likely in part due to soaring power prices. Only Sabine Pass and Corpus Christi managed to retain feedgas at around 25% of pre-storm levels. What this means is that an estimated 10-15 cargoes have been taken out of the global market for March delivery, with no cancellations likely for April.
But while the ramifications of the storm will be felt for years to come, the immediate crisis was soon over, with the US gas market heading into balance earlier this week. Consequently, day ahead gas prices are pretty much back at pre-crisis levels, and with this the incentive and opportunity to export LNG has returned.
How did US LNG producers and tollers react? Clearly there was a major commercial incentive to curtail LNG output. As domestic prices shot up, huge margins from selling previously purchased gas back into the local market trumped exports. Both Cove Point and Elba Island regasified produced LNG for sale back into the grid, while tollers would also have had flexibility to resell gas back into the domestic market due to their commercial structure.
With domestic gas and power prices now back to normal, this opportunity has closed, and LNG production has ramped back up as margins into Europe and Asia look more attractive. And I fully expect suppliers to make up lost volumes pretty quickly as feedgas recovers.
Why didn’t Asian spot prices react? I think buyers were very rational. We are way past the winter demand buying season and liquidity in the Pacific spot market has improved. This means there’s a much more limited call on Atlantic spot volume into Asia beyond what has already been contracted. Asian buyers appear to have taken a deep breath, looked at the relatively limited number of cargoes likely to have been lost, considered the likely speed of recovery and said, “we can live with this”. In fact, from looking at the market I think less than half of this volume could have gone to Asia. Given current liquidity, these cargoes can be backfilled from elsewhere without much disruption based on our upcoming 2021 Q1 short term outlook.
Global LNG prices have now fallen as fast as they have risen from the January highs. Month ahead prices for delivery into Japan for example are about $6.30/mmbtu right now, giving confidence that the market doesn’t see last week’s supply disruption as too painful for Asia.
Do you see any longer-term consequences for US LNG in Asia? The disruption of US supply was manageable in APAC due to improved global liquidity, but can you imagine if it had happened a few weeks ago? I think we’d be talking about an even more jittery market as fear would have pushed Asian prices even higher. It’s also likely this would have meant more feedgas finding its way into US liquefaction capacity to take advantage of this.
We know how much buyers in Asia value security of supply. Looking forward, these buyers will be asking what regulators and companies in the US will do to avoid a repeat. As my colleague Ed Crooks pointed out in the Energy Pulse last week, ‘temperatures as low as the ones we have seen…are rare in Texas, but not unprecedented.’ Asian buyers will be asking about the winterisation of the power grid and gas supply supporting US LNG. I expect they may also raise questions about the implications of the planned retirements of nuclear and coal plants on future polar vortex events, given their critical role over the past week. The reputation of the US as a reliable LNG supplier could depend on it.